Expand your understanding of institutional plan performance, asset allocation and risk.
June 16th, 2020
By Sanjoy Chatterjee, Chief Strategy Officer
The discussion about whether capital markets are efficient or not, and if active managers can add value over a passive benchmark, has been ongoing for decades1. This has led many to invest their money in passively managed portfolios as logically speaking, why would you pay a higher management fee if the market is unbeatable?
The performance of active and passive management has been cyclical, with each style trading periods of outperformance and underperformance. Like the ocean tides, active and passive management’s performance ebbs and flows since market corrections are a regular and unavoidable part of market cycles.
Historically, active managers typically outperform their benchmarks during periods of higher volatility. While there has been a long run of the bull markets, the current global COVID-19 pandemic has led to a lot of market volatility during the first quarter of 2020.
According to the data submitted to the Investment Metrics Global Database, five of the six style universe categories reviewed had more than half of the active managers outperforming their respective benchmarks in Q1 20202. With the current market environment, it is evident and prudent for all institutional investors to review their portfolio structure, investment policy, and their overall policy benchmarks across all their asset classes. Most Institutional investors, therefore, are likely to consider some changes that are both tactical and strategic across all asset classes to meet their long term obligations.
All institutional investors have a fiduciary responsibility to ensure that they can maximize the total return for each unit of cost and therefore the focus on realized Net of Fee return is optimal across all asset classes. It is evident that active management fees are multiples of passive management fees even after the years of fee pressure that has resulted in fee compression across the board.
Hence the current period in many ways is an ideal opportunity for most active management strategies to win new mandates provided they are competitive. One of the key criteria for active management strategies to be successful is to differentiate their portfolio construction capabilities coupled with rightsizing of fees based upon the mandate size and sponsor type.
Historically, getting accurate information on asset manager fee data has been a complicated, opaque, a less than precise and clear process. The published list fee is never the actual or the negotiated fee—a phenomenon that asset owners have long been complaining about and asking for more transparency. From asset managers’ perspectives, having the “right” fee and knowing where you stand among your competition is critical to winning highly competitive institutional mandates. Having accurate sources for granular fee data to appropriately benchmark themselves can help asset managers grow their assets and margins.
In the end, this data and insight are what will distinguish asset managers with similar offerings, to gain a true competitive edge.
Technology and transparency into actual post-negotiated manager fee data enable asset managers to gain competitive insights across the institutional plan types, asset classes, and mandate sizes.
In these trying times, it is even more critical to invest in technology and data that provide insight into success factors such as comparing actual fees vs. performance across all plan types.
In light of the current pandemic, there will be a flurry of new mandate search requests on the horizon. This is why it is crucial to have access to actual post-negotiated manager fee data as a true benchmark for success.
The time to act is now. Having access to Fee Analyzer tool and utilizing it will most definitely help drive growth in assets.
Investment Metrics’ Fee Analyzer draws from our portfolio analytics and reporting platform, which covers over 20,000 institutional plans and 500,000 portfolios, resulting in the most comprehensive and trustworthy source of actual, post-negotiated fees across major asset classes, investment vehicles and plan types. Its breadth, accuracy, and timeliness of information is unparalleled in the market.
Here’s an example of what you can expect to find: Percentile Distribution of Fees and (Active Only) by Mandate Size for US Large Cap Equity and Frequency Distribution of Fees (Active Only) by Basis Point Range for US Large Cap Equity peer group.
1Eurgene Fama discussed the efficient market hypothesis (EMH) in his paper entitled Efficient Capital Markets: A Review of Theory and Empirical Work. 1970
2The six universes of the equity market reviewed are global large-cap, international large-cap, emerging markets, US, large-cap growth, US large-cap value, and US large-cap. We found 39% of active emerging markets equity managers outperforming their index, while the other universes have more than half of the active managers outperforming their respective benchmarks in Q1 2020. For more information, please read Active Equity Manager Performance Through COVID-19 Market Volatility.
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